Dim Weight: What’s the Deal with Parcels?

As a transportation sales rep, I spent the past year helping shippers prepare for the expansion of dimensional weight pricing, which was first announced by FedEx on May 2nd, 2014. The experience was an opportunity to learn about the parcel industry’s most pressing subject and how it impacted businesses.

What’s Dim Weight?

Dim weight is a volumetric pricing method used to compare the actual weight of a parcel with how much space it takes up in a physical carrier network.

How to Calculate Dim Weight?

The dim weight formula = LxWxH/166 (166 is the standard domestic dim divisor used by UPS/FDX, whereas USPS uses 194). Using the 166 divisor, the dim weight for a 15x15x15 package is 21lbs. The dim weight for a 20x20x20 package is 49lbs.

The dimensional weight threshold is used to determine whether or not to compare actual weight with dim weight in order to determine the correct billed weight. For example, a 15x15x15 box = 3,375 cubic inches. If the dim threshold is 1728 (1 cubic ft.[1]) and the actual weight of the package is 5 lbs., then the billed weight is 21 lbs. (3375/166 = 21). If the dim threshold is 5184 (3 cubic ft.), then the billed weight is 5 lbs. With no dim threshold, shippers always need to compare actual weight with dim weight.

What’s New?

Dim weight pricing isn’t new, yet industry tolerance for light-weight packaging (i.e. packages that contribute to trucks ‘cubing out’ before reaching the max weight limit) has been significantly lowered. Prior to January 2015, UPS/FDX ground shippers had a 5184 dimensional weight threshold incentive in their carrier agreements. This meant that if a shipper used a 15x15x15 (3,375 inches) box to ship a 5 lb. item via ground, they would’ve been billed at 5 lbs. With a 20x20x20 (8,000 inches) package weighing 5 lbs., the shipper would’ve used the dim weight formula (LxWxH/166) to compare dim weight with actual weight (20x20x20/166 = 49 lbs.) The difference between a 5lb and 49lb standard zone 2 ground shipment[2] is about $10. If the same shipper could’ve securely repacked (i.e. meeting the standard packaging guidelines) the goods in a 15x15x15 box, they would’ve cut their costs in half. Since the expansion of dim weight pricing meant the removal of the standard 5184 ground dim weight threshold, the same 15x15x15 package weighing 5 lbs. would today be billed at 21 lbs., raising the price by about $5. The 20x20x20 package weighing 5 lbs. would still be billed at 49 lbs.

Given that the bulk of e-tailer’s transportation costs are for single-piece shipments to consumers, costs for UPS/FDX D2C shippers have gone up substantially as a result of the standard dim threshold removal. The cost impact for shippers varies with a combination of products, packaging and shipping characteristics, ranging anywhere from no impact to a rate hike of over 100%. One of the largest impacts that I saw was with a manufacturer and distributor of stuffed animals, where 80% of their outbound parcel shipments were impacted. It wasn’t uncommon to meet e-tailers who decided not to reorder certain product lines as a result of their dim cost analysis.

Why Now?

Package space affects network capacity (customer satisfaction) and therefore costs (carrier profitability), such as equipment, labor and guaranteed service refunds. Given the fifteen percent year-over-year growth trend in eCommerce and the unpredictable behavior of consumers, the ability to forecast package distribution accurately became a big problem for UPS/FDX, contributing to network bottle necks and service failures. Both carriers were heavily criticized by media outlets after their failure to deliver last minute orders upset consumers and retailers during the holiday season in 2013. As a result, a PR campaign was launched. “We’re ready for peak season!” became the spirited roar at UPS in 2014. From the operations end, FDX/UPS executives made sure that no expenses were spared in order to prevent a second round of service failures. On the financial end, analysts mapped out the costs and realized that these network investments would prevent them from hitting their target earnings. The dim expansion announcement came out well before the 2014 earnings report, which confirmed that neither UPS or FDX could balance rising operating costs with diminishing network capacity while upholding their service standards. The solution was to expand dim weight pricing in order to sustain profitable growth.

USPS’ Delivery Point Platform: Ramping up Parcel

For USPS, which only applies dim weight to higher zones, the FDX/UPS expansion of dim weight pricing has provided a much needed opportunity to ramp up its parcel business. Take note of USPS’ aggressive advertising practices (see cover photo). USPS means business, and rightly so. The postal industry is widely concerned that millennials and future generations will abandon mail, leaving us with the largest delivery point platform in the world with nothing to deliver. That’s where parcels come in. Residential deliveries aren’t particularly attractive to FDX/UPS, as they cost more for less return. On the other hand, USPS is obligated to provide ‘universal service’ for U.S. citizens and therefore is a commonsense solution for handling the last mile delivery of parcels.

Priority Mail volume increased by 10% over 2014 in the third quarter of 2015, while Parcel Select (e.g. FDX SmartPost, UPS SurePost and DHL Global Mail) volume increased by over 25%; a win for USPS, about double the growth rate of the prior year[3]. USPS is about to increase its rates for competitive services (impacts parcel categories), which some believe may be related to a case presented by UPS to the Postal Regulatory Commission (PRC), which claims that USPS is not covering its institutional costs[4]. The bottom line is that UPS and FDX need the USPS delivery point platform to compete in eCommerce, as retailers cannot afford to sell inexpensive products online and pay for ground or air services. Likewise, UPS and FedEx cannot afford to deliver large, light-weight packages to residences. Yet consumer demand is pulling the industry towards making home deliveries more affordable and customizable.

Conclusion

While most UPS/FDX shippers still have an opportunity to reduce package size and cost, many others have already reached a ceiling. This means that in addition to tailored packaging, shippers need to consider other options to mitigate the dim cost impact, such as exploring alternate services/carriers, consolidated warehousing/distribution, or other negotiable carrier agreement incentives, such as a dim variance or a custom dim divisor. As far as the future of dim weight pricing, it’s here to stay. The major carriers will help offset the cost impact by making concessions in favor of shippers who adopt best practices.

By Evan Grillo

The comments in this blog are moderated. Each comment will be reviewed to ensure that it contains no crude language, solicitations, personal attacks, or anything that may be regarded as inappropriate is included. In an effort to facilitate an ongoing conversation, comments will be reviewed in a timely manner. The views that are expressed in this blog are those of the individual contributors and do not reflect the views of PostalVision 2020. If you have any questions about commenting or are experiencing issues, please contact Bryan Klepacki.